Mo' money, mo' problems.
As City staff gear up for the 2017 budget process, the mayor has declared that an above-inflation property tax revenue increase is off the table. Council has also successfully pushed off introducing any new revenue tools until next year. What does that mean for the budget? We read the City Manager's latest report [PDF] so you don't have to.
The Operating Budget
Every budget process starts off with City staff figuring out how much revenue the city is taking in and what it costs to keep the city running: paying librarians, funding festivals, clearing snow, and so on. Our revenue never covers our expenses, so we are left with a very large gap, a.k.a. the budget shortfall, budget gap, or structural deficit. Why? It depends who you ask. One group, mostly suburban councillors, says it's because municipal government is wasteful and inefficient, and the fix is to rein in spending. Others, primarily from the old City of Toronto, say we have all the costs of a major city and need the revenue to match—from new taxes, federal and provincial funding, or both. Really, it's a matter of perspective: the two camps have very different ideas of what a city should look like and what its government should be responsible for.
This year, the City's revenue is increasing by $66 million. Most of it is from property taxes (assuming a two-per-cent increase to match inflation). This is a net figure; staff aren't counting last year's "one-time revenues", which include drawing from reserve funds.1 Meanwhile, operating expenses are $582 million higher than last year, largely due to debt financing and the rising cost of running the TTC, TCHC, and TPS.
This leaves the City with a $516 million shortfall, which staff and councillors will find ways to whittle down over the next several months as they work on the budget.
Now, you have to take this number with a grain of salt. Ostensibly it represents what the City's revenues and expenses are if we keep everything the same as last year—no service level changes, nothing Council didn't already agree to. But, as Brian Kelcey explains, which expenses are included and which are set aside as unfunded "extras" can be somewhat…arbitrary. Last year, things that Council had already voted to spend money on—the Poverty Reduction Strategy and TCHC improvements, among others—were mysteriously left off the list. Had they been included, the shortfall would have been tens of millions of dollars more.
The Capital Budget
The iceberg! The iceberg is back!
If the operating budget is for stuff like keeping the buses running, the capital budget is for buying the buses: major, multi-year infrastructure-related projects and purchases.
Like *cough*someone*cough* waking up to the results of a self-indulgent late-night Amazon shopping spree, Council has found itself with a dizzying list of things it needs right now—all of them!—but has no way to pay for. This $29-billion wishlist includes massive but mundane expenses, such as flood prevention and state of good repair (SOGR) backlogs, but also charismatic mega-projects like the Relief Line and the protean SmartTrack.
But it's not like we have to pay cash, right? These are things you borrow money for. The problem is that the City is very, very close to maxing out its metaphorical credit card. Remember how we mentioned that debt financing is a major cost driver? We can't let our payments get too high, or it might bring down our credit rating.
Unlike the annual operating budget, the capital budget looks 10 years ahead. That means that, as things stand now, everything on the list is going on the back burner until the end of the current capital plan—2026. In the meanwhile, Council and staff have to figure out which projects to prioritize—we can't afford to do them all at once.
Kick the Can
What's the bigger picture? How did we get here?
Toronto has had two successive mayors with the same goals:
- Keep property taxes low.
- Build big, expensive, legacy-making transit infrastructure.
In order to reduce the City's main source of revenue, Council has dipped into reserve funds, cut staff numbers, hiked user fees, and become increasingly reliant on the land transfer tax. They've also just plain not done stuff they voted to do. When presented with other ways to generate revenue, they've stuck their heads in the sand or postponed the debate. (As the City Manager explains, "It should be noted that revenue tools currently under study may not be available for the 2017 budget process and should not be considered as providing any significant relief for 2017.")
The report assumes that Council will once again pass a property tax increase at or below inflation. But they have to stop pretending it can be done without affecting programs and services.
Further expense reductions in 2017 would require strong action and a willingness to both reduce and sustain reductions in service levels. This will require significant changes in service directions, if residential tax increases are to be kept at the rate of inflation. However, it will be necessary to ensure that budget decisions taken in 2017 are consistent with the City's emerging priorities in the long-term. The two directions may conflict with each other.
Translation: You can't simultaneously promise to keep taxes low and improve services. If you choose to freeze taxes, you will have to cut services. Think real hard about what's more important to you.
The City cannot achieve fiscal sustainability through expenditure reductions alone. The City requires revenues that increase annually to help fund City services and hence it is not sustainable or realistic to constrain total revenue increases.
Translation: You can't fix the structural deficit by "finding efficiencies" every single year. There are no massive savings to be had. This is what city services actually cost. Sooner or later you have to start paying for them.
Not this year, though. Maybe next year.
In last year's preliminary budget [PDF]2, the City Manager presented two scenarios for the Budget Committee to consider: a tax increase that worked out to a 2.17-per-cent residential property tax increase, and one that worked out to a 1.3-per-cent increase. This report reframes the scenario—instead, the City Manager assumes the property tax increase will be 2 per cent and presents Council with what cuts will have to be made to achieve that. Councillors don't get to weasel out of their responsibility by pointing to staff:
In prior years, the City Manager and Deputy City Manager and Chief Financial Officer have set the operating budget target as the key guideline for budget preparation for all City programs and agencies in advance of budget preparation. These targets have been met with varying degrees of compliance and impact. Beginning with the 2017 budget process, City Council must approve operating budget targets for all City programs, agencies, and accountability officers.
Here are the options:
Option 1: A 2.6-per-cent cut across the board.
This may not seem like much compared to the 10 per cent Rob Ford demanded in 2011, but it comes after years of similar cuts (often called "unspecified savings", "efficiencies," etc). Last year, for example, the Mayor asked for 2 per cent. It also cuts indiscriminately: some divisions and agencies are facing more budget pressure than others.
Option 2: TTC, TPS, and TCHC budgets frozen at zero per cent. All other divisions and agencies get a 5.1-per-cent cut.
This option spares the three most important (and cash-strapped) agencies from cuts, but at the cost of cutting more from everyone else. TCHC and the TTC have considerable budget gaps already, and the TPS budget is notoriously difficult to cut.
Option 3: TPS and TCHC budgets frozen at zero per cent. 4.1-per-cent cut for the TTC. All other divisions and agencies get a 3.8-per-cent cut.
One reason the TTC's budget has grown so much is that they have higher capital costs to finance. This essentially makes the TTC pay their own way when it comes to debt financing. Putting more pressure on the TTC means other divisions and agencies don't need to cut as much.
Which would City Council favour? Honestly, it's anyone's guess. A new report on revenue tools has just been released, and new cost estimates for SmartTrack and the Scarborough subway seem to be coming out every day. While we don't expect the City's financial situation to change much, there's still a lot of time for councillors to make up their minds.
Enjoy your summer—the preliminary budget won't be launched until December 2! We'll leave you with a helpful visualization. As you go about your day, pay attention to how municipal services shape the city around you: how crowded the streetcars are, how long you wait for the bus, if the grass in the park has been mowed lately, your place on a daycare waitlist, your place on the housing waitlist, potholes, street festivals.
Think about what improvements you would make given a bit more money.
Then think about that never happening.
Adapted from Twitter.
1. Yes, taking money from capital reserves counts as "revenue." This is just one way the City budget can be confusing and give people (including politicians) the wrong impression about the state of our finances. ↩
2. pp. 110–121. ↩